Carson Block, of the famous Muddy Waters Research Chinese fraud sleuthing firm, told the PCAOB, the accounting regulator, that the whole Chinese market and the auditors that audit it are corrupt:

As an investor who has invested considerable amounts of money in China, and in the process helped to identify Chinese frauds traded on US exchanges, I support your initiative...Even the most reputable auditors in China seem to be in a race to the bottom. We believe that there are particularly egregious situations in which some Big Four partners in China offices have actually conspired with their clients to defraud investors. Further, it is a reasonable proposition that the conflict of interest inherent in the Chinese auditors' business model also affects the quality of US company audits.

Soyoung Ho, who writes for Thomson Reuters Insights (subscription only), has posted some thoughtful articles on the subject but the quotes she gets sometimes don’t add up.

Roberta Karmel, a professor at Brooklyn Law School and a former SEC commissioner, had some harsh words for the SEC and the New York Stock Exchange to even let U.S. investors be at risk in the first place by allowing Chinese companies—many of them that are found to have accounting problems—to be listed in the U.S..

“Should the SEC allow any companies that are audited by auditors who refuse to produce information in U.S. courts to be listed on an exchange to be sold to U.S. persons?” Karmel said.

“Should the New York Stock Exchange allow a company to be listed under circumstances where its auditors are not going to be forthcoming with information if problem arises? It’s kind of giving a stamp of approval to the companies which they don’t seem to deserve.”

“They have been structured as a worldwide organization. They have separate [firms] in various jurisdictions,” Karmel said. “How can Deloitte say ‘oh yes, we have Deloitte Shanghai and they are Deloitte, but we have no control over it'? They are, however, putting their names on these audits. That seems to be a preposterous posture.”

As a former SEC Commissioner, Professor Karmel should know that Deloitte U.S. and the international coordinating firm, Deloitte Touche Tohmatsu Limited doesn’t control Deloitte China any more than I can control my 130 lb. Rottweiler if she’s determined to chase that squirrel.

Read the fine print. The global audit firm network is a legal structure created to support a brand, not a professional services firm serving the public and the global financial system.